Hello my friends, and welcome to another episode of Ask Marco on the Passive Real Estate Investing show. Well, I’m glad you’re here. It is late October. Halloween is coming up. The national elections Federal US elections are coming up in less than two weeks and there’s a lot going on and we’re on the home stretch. Wrapping up 2024, what will 2025 hold for us? Who knows! Hopefully mortgage rates will come down. They’ve come down a bit, then they bounced back up. Now it’s just a matter of time, I think before they come down a little more. Who knows? I’ll give you my predictions in the coming weeks. In the meantime, I went to my Ask Marco folder and I pulled out one, maybe two questions. This is a really good one and I have to apologize to Christopher here. It’s a couple months old.
You’ve probably figured out some of this stuff, but they’re really good questions and I thought it would be good for the listeners as a whole. So if this is not timely for you, I apologize. I’ve got a backlog of email of all kinds, but I try and get to as many of these as I can.
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Anyway, Christopher writes in and he says, hi, Marco. First of all, thank you for all the time and effort you put into your podcast. I went back to the beginning episodes in 2015 and started listening a year and a half ago. Well, thank you. Fast forward to today. I got in touch with Melissa at Norada Real Estate and she coached me through the entire process and was extremely helpful. Well, I’m glad to hear that. She’s great. My whole team is great. They’re all wonderful. I just closed on my second rental property in Tuscaloosa, Alabama, so, and that’s great.
You’ve got two properties under your belt. Great start. And I love the momentum, so keep going there. Christopher, I was just listening to your May 22nd episode and it talked about setting up an LLC and opening bank accounts once you’ve acquired the rental property. This is my next step and I’m a little bit unsure how to proceed. Now, this is true for many people who are getting started or in some cases actually have a small portfolio and they’ve never really stopped to set up separate accounts or even LLCs to hold title to their properties from an asset protection perspective. I do talk about this on the show from time to time, and it’s both a big topic and a small topic all at the same time, but it is certainly an important topic. So Christopher has four questions here and I’ll just kind of break them down one at a time.
His first question is, what is the best way to go about opening an LLC and ensuring I have proper asset protection? I understand it’s easy to open an LLC, so is this something I can do myself and then contact the title company to transfer the deed or should I be using an attorney or other service? Well, the answer is, it depends. There’s no right or wrong answer here. It just depends on, on your level of comfort, your level of understanding, your required expertise. I myself, have opened many LLCs on my own self-serve through one of many online services, and I will probably just drop a link in the show notes for you or for anybody who’s listening to this episode for that for one of the services I use. But for me, it’s just convenient to have everything managed in one place. And it covers everything from the setup, the annual maintenance, which is very little, but the annual maintenance basically the annual filing that you have to file with the state or refile with the state just to keep your LLC active and open and in good standing.
And then of course, if it’s not in your home state, you’ll need the service of what’s referred to as a resident agent. This is sometimes an attorney or a law firm or a firm set up and appropriately licensed in that state to be your resident agent. Basically, they’re there to receive any kind of legal notices that are served to your LLC or you, but to receive them on your behalf since you’re not there physically. And that’s what the role of a resident agent is. But this is true in every state. So you can hire the services of an attorney, which is not a bad idea, especially if you’re just getting started or learning. But there are many attorneys out there who focus and specialize in asset protection. Some of them are very high end, some of them probably have many services that you don’t need or won’t want, but you just have to shop it around.
And we can refer you to some people as well. But at the end of the day, you could use a self-serve website company that does this for you. It’s basically an online self-serve model and they provide all the services you’ll need, like a one-stop shop if you will, or you could use an attorney to help you do this. And it could be a hybrid approach. You can use an attorney and then move on to doing it yourself and managing it yourself. And then, you know, if you have the need for an attorney, you can always rely on them to help clean up or get you caught up if you’ve fallen behind on anything like filings or whatnot. But yes, it is easy to open up an LLC online. It is something you can do yourself. And then once you have it set up at any point in time before, during, or after your transaction, in other words, when you’ve closed escrow on your property, you can have the escrow or title company transfer title out of your name into the name of that LLC.
And ideally that is in the same state as the property. Now I’m not an attorney and I’m not giving legal advice. This is just the way I’ve been taught and what I’ve learned over the years. But as a general rule of thumb, you want the LLC in the same state of the property and it holds title to that one property. In some cases it could hold title to multiple properties in that state. It just depends on your risk tolerance and how much equity you want exposed through that LLC should anything ever happen. So that’s a decision for you to make or for you to make along with an attorney that you’re working with. And believe me, you can have five or 10 different attorneys give you five or 10 different opinions on this. So for me, I’ve kind of gone to the point where I hold more than one property in an LLC, but I will also gauge as to how much equity is in that LLC and then spin it off to another LLC if necessary.
Alright, your second question is, do you have any insight on additional insurance recommendations? I am a high income earner and I recently talked to someone about having something called an umbrella policy that covers you for any personal liability beyond your property insurance in case someone decides to come after you as your net worth grows and you become more at risk and a potential target. Any advice on this would be very helpful. Well, interesting question because I was just reviewing my umbrella policy with my insurance agent and the lady I was speaking with at the agency, she said in her, I think it was 25 years, her 25 years of experience in the insurance industry and dealing with the umbrella policies. She said she’s never once, not once ever had a claim filed against an umbrella policy. And, and for whatever reason, I don’t know, but the fact that she’s been in the industry that long was an interesting statistic.
So it just appears that it’s good to have, it is a backup if you can get it, you know, affordably or cheaply, great. Sometimes they can be expensive. It just depends on the liability coverage. But the reality is, is that they probably don’t get used very often at all. So I’m not telling you not to get an umbrella policy. If you have a high net worth or you’re definitely a target for lawsuits, then it probably makes sense ’cause number one, you can afford it too. It’s a backup. It’s just additional insurance coverage to protect you beyond the liability limits of your other insurance policies, whether it be your home policy, your car auto insurance, and property insurance. So it’s definitely not a bad idea, it’s just you kind of have to weigh pros and cons in the cost of it. I don’t think it’s a bad idea, but I do believe that it is rarely, rarely used as a backup insurance policy that will pay a claim.
Alright, anyway, I don’t know if I’m helping you with that, but those are my 2 cents on additional insurance. Umbrella policies exist. They can be expensive, they could be cheap, you just have to shop it around and you know, if it makes sense for you financially and your risk tolerance, it’s worth getting. Your third question, I opened a heloc, a home equity line of credit with a local credit union for the down payment on both my rental properties. This came with a checking account also in my name. My plan is to have my rental income deposited into this account, which would then be used to pay the mortgages and the heloc. This would keep everything separate from my personal accounts. However, once I create an LLC, can I continue to use these accounts that are in my personal name or do I need to open another separate bank account under the LLC name?
The short answer is you need to have everything separate. The LLCs are separate entities from you, and therefore they have to have their own separate bank accounts with their own EIN number, their essentially their tax ID number with the IRS. And that makes it a completely separate entity that stands on its own, that has its own accounting, its own bank account, its own set of books, its own existence if you will. So you can’t share a personal bank account with an LLC that’s supposed to be acting as an asset protection tool. And there’s probably no attorney out there that will tell you otherwise. So definitely keep it separate, run it as a separate entity, run it as a separate business. You are you and your entities and your businesses and your properties are separate businesses, separate assets. And just think of it that way. Treat it as a business, run it as a business.
And number four is, how would you recommend finding a tax strategist? I have searched local CPAs, but find it hard to tell if they really understand how to come up with a comprehensive tax or wealth strategy with rental properties, W2 income real estate professional status if possible to reduce W2 taxes, et cetera. Well, another great question. So yeah, I would agree with you that it’s probably difficult to find a tax strategist because there are many people out there who are probably very competent in what they do. They’re highly qualified CPAs and sometimes even EAs enrolled agents that understand taxes in, you know, tax forms, tax filings, the tax code. But it’s really the strategy side that you’re looking for. It’s not the tactical side or the the knowledge side. Just knowing what the tax law says and how to fill out forms and file them and putting the right numbers in the right boxes.
So it’s a layer or level above and beyond that. And that’s where the challenge comes in because you really need to know what they understand about investing and tax strategy, not just tax filing or tax implementation. So it can be very challenging and you know, I’ve run into people on and off over the years that I feel have a high level of competence. But to find a tax strategist knowledgeable about your situation and especially as it applies to rental properties, these are some of the things you can, you know, look at or try. Obviously there are specialized associations out there. You can check the directories from these different organizations like the National Association of Enrolled Agents, also known as N-A-E-A, or the American Institute of Certified Public Accountants. It’s A-I-C-P-A. You can look for members who are listed there with the categorization of real estate or rental property taxation as one of their specialties.
That’s a good place to start to find people that you can contact and interview. And yeah, I, I said interview. I mean, you want to be interviewing them because you are hiring them. It’s not that they are looking to bring you on. Second referrals from real estate networks. There are, you know, different real estate clubs and real estate networks and groups out there. Many real estate investor groups or even landlord associations have recommendations for tax professionals, local real estate investment clubs, also known as REIA, Real Estate Investment, well, R-E-I-A Real Estate Investment Association. But it’s really a club and online forums can be great resources. Again, you wanna find people that you can contact and interview. Look at industry expertise, look for keywords attached to individuals like CPAs who are focused in areas like real estate that talk about real estate tax or landlord tax strategies or maybe you know, keyword phrases like rental income in their profiles.
Some tax strategists list these specialties on their LinkedIn profiles. So if you find somebody, see if they have a LinkedIn profile and just see what they list there. Again, another tool and way to narrow down or eliminate people and names that you come across or that are referred to you. But the big one for me is, you know, interview them and ask questions. ’cause Once you find some candidates and you, you know, get on a phone call or a Zoom call or whatever it is, you can ask specific questions about tax strategies for rental properties and rental property ownership. Discuss topics like depreciation. Let them talk. Discuss topics like passive loss rules, 10 31 exchanges and how they would approach deductions on repairs and improvements. That can go pretty deep. Also, ask them about cost segregation. Do they understand what it is and how it works?
Ask them questions and probe and let them talk and see how deep they go. Their answers will indicate the depth of their expertise, and that’s what you want to know is how deep their expertise is. Another thing to ask them is, do you own real estate? Are you willing to share, you know, how large or small your portfolio is? They don’t have to give you specific numbers. If they’re willing to share that, that’s great. But if they come right out and say, well, I’ve been investing in real estate for, you know, 10 or 15 or 20 years and I’ve got a portfolio of 10, 15, 20 properties, you know, that will tell you a lot. Not everything, but it will tell you a lot because you know, obviously they’re thinking about taxes and tax strategies as well as an investor. They’re not just a specialist or a CPA or anything like that.
They are actually walking the walk and doing what you are trying to do. And then, you know, last but not least is online reviews. This is kind of probably one of the last places you go. Maybe you start with it as well, but you know, look at reviews on Google or Yelp and sometimes even the Better Business Bureau to gauge other people’s satisfaction with them, you know, among similar clients. So, you know, that’s just to me, icing on the cake. It’s not really where you necessarily start, but those steps should help you find a tax strategist that’s hopefully well versed in the nuances of owning rental property and tax law and how you can implement a tax reduction or tax deferral strategy that will help you save on your taxes now and in well into the future. So Christopher, thank you for the questions. These are all great. We’re talking about LLCs, bank accounts, umbrella policies and whatnot. This is all important stuff for every real estate investor. It’s not just for one person. Again, sorry for the late response, but it’s good. Hopefully this, there’s a little bit more you’ve learned from this and I know this is gonna help other listeners as well.
That is it for today. If you have any questions about investing or real estate, be sure to send them to me. Go to passiverealestateinvesting.com, click on the Ask Marco button, let me know. If you haven’t subscribed, remember to do so. It’s simple and easy. It takes you three seconds to subscribe to the show. You’ll never miss a weekly episode. Help us share the show with other like-minded people. Leave us a rating and review on iTunes. I greatly appreciate it. That is it for this week. Thank you for listening. I’ll see you all on our next episode.
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